Question

Discuss in your workshop group: Martin Ltd has always had a strategy of product differentiation; that is, providing high-quality products and extracting a price premium from the market. During the recent economic downturn, Martin Ltd saw its customer base diminish, and decided to move strategically to a cost leadership strategy, that is, to try to sell more products at a lower price. Required: What are the implications of this strategy change for the expenditure cycle?

Answer 1

A very good question, and a strong analogy can be drawn with the company many of us are aware of today - Apple Inc.

It is given that Martin Ltd. has had a strategy wherein they focused on delivering high quality products to the end consumer at a premium price. This also implies that the customers had a perception of high quality products while purchasing products from Martin Ltd. It is important to know that customer pays dollars = the value he/she perceives. This is an important concept here which we will use to further corroborate our stance on the question.

Now, the company is completely changing its focus from being a premium provider to a cost leader - that is, providing products at the best price (read cost effective). They are going for volumes.

This will be tricky as customers now have a perception that Martin Ltd. is a premium provider. If the company now decides to go in for cheaper products, it might not sit well with the customers, and they might end up losing their existing lot of customers.

This will result in a change in demographics of the buying population at the company. The customers who look for premium products/quality might fall out, however there might be a lot more customers who would be ready to purchase products at a lower price - hence the customer base of Martin Ltd. would change, and this also means that the expenditure cycle would auto adjust accordingly.

In terms of revenue, the company should see stronger sales as elasticity of demand would ensure that if the prices go down, then the sales/demand goes up. The change in strategy is also in sync with the economic downturn (which means expenditure cycle goes down/is less frequent), and hence the sales should actually go up.

Hence, the strategy has its ups and downs - the positive is that since it sits well with the reduced frequency of the expenditure cycle, it will bring in more change. The negative is that the perception that Martin Ltd. has built in the minds of its customers so far about being a premium brand will take a hit.